No. 7232

Hn the Wnited States

GVirrntt Cowt of Appeals

for the Ninth Girrnit / >’

JAMES W. MALONEY, Collector of Internal Revenue of the United States for the District of Oregon, APPELLANT

V,

WESTERN COOPERAGE COMPANY, a corporation, APPELLEE

ON APPEAL FROM THE DISTRICT COURT OF THE UNITED STATES FOR THE DISTRICT OF OREGON

BRIEF FOR THE APPELLANT

JAMES W. MORRIS, Assistant Attorney General

SEWALL KEY,

JAMES P. GARLAND, Special Assistants to the Attorney General CARL C. DONAUGH, United States Attorney.

GLASS-KROHN PRINTING CO.

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Argument:

The resolution did not constitute a declaration of dividends such as is contemplated by Section 213 of the National Industrial Re-

GOMEEy ANGE desde tecterceseeecencenceserecater eee een aos na oe oe 8 Wp rT lit SCs cer a cers ee ae een na eee ey ease eae ests ru saseeeecee cies wieeiesscasaxsaase 13 CITATIONS Cases: Pages Alabama Pipe Co. v. United States, 21 F. Supp. 173.......+.----------+ 11 Alexander & Alexander, Inc. v. United States, 22 F. Supp. 921........ 11 mee croc mer, 98 F(a yO oo cessescee sec cconesncbosgeccetes ees 10, 12 Evening Star Newspaper Co. v. United States, 16 F. Supp. 1020...... 11 Greenwood Compress & Storage Co. v. Fly, decided August 10, 1938 12 Lockhart Iron & Steel Co. v. O’Toole, 22 F. Supp. 919........---------- 11 Sind Si, MIOOHA, NOD I8S6l, (ANS eee ee 10 Ne corm Ore OS ety OL ee ee eee ee ete eee 10 United States vy. Murine Co., 90 F. (2d) 549, certiorari denied, 302 (UA pate 7/3 ie peat PsP oC eee eee 10) 12 United States v. Southwestern Portland Cement Co., 97 F. (2d) EE) Lae ge eee 2a Js ny RO I 2 eee en jbl, 2 United States v. Southwestern R. Co., 92 F. (2d) 897 ...e.csseeeeee nee iP) Statute: National Industrial Recovery Act, c. 90, 48 Stat. 195, Sec. 213........ 2, & Miscellaneous:

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Iu the United States

Girrntt Cot of Appeals

for the Ninth Circuit

No. 772

JAMES W. MALONEY, Collector of Internal Revenue of the United States for the District of Oregon, APPELLANT

Vv.

WESTERN COOPERAGE COMPANY, a corporation, APPELLEE

ONSAPPEAL PROM THE DISTRICI COURT OF THE UNITED STATES FOR THE DISTRICT OF OREGON

BRIEF FOR THE APPELLANT

OPINION BELOW

The findings of fact and conclusions of law (R. 35-44) are not reported.

JURISDICTION

This appeal involves a claim for refund of Fed- eral excise taxes paid on the receipt of dividends dur-

Z

ing the period from June 16, 1933, to December 31, 1933. Judgment was rendered in favor of appellee on July 5, 1938, for the sum of $6,449.72 with in- terest, from which decision defendant below appealed on October 4, 1938. (R. 45-47.)

The jurisdiction of this Court is invoked by virtue of the provisions of Section 128 (a) of the Judicial Code, as amended by the Act of February 13, 1925.

QUESTION PRESENTED

Whether a resolution adopted by the board of directors of taxpayer corporation constituted an en- forceable declaration of dividends as of a date prior to the enactment of the taxing statute.

STATUTE AND OTHER AUTHORITY INVOLVED

National Industrial Recovery Act, c. 90, 48 Stat.

1:

SEC. 213. (a) There is hereby imposed upon the receipt of dividends (required to be included in the gross income of the recipient under the provisions of the Revenue Act of 1932) by any person other than a domestic corporation, an excise tax equal to 5 per centum of the amount thereof, such tax to be deducted and withheld from such dividends by the payor cor- poration. The tax imposed by this section shall not apply to dividends declared before the date of the enactment cf this Act.

(b) Every corporation required to deduct

lle

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and withhold any tax under this section shall, on or before the last day of the month follow- ing the payment of the dividend, make return thereof and pay the tax to the collector of the dis- trict in which its principal place of business is located, or, if it has no principal place of busi- ness in the United States, to the collector at Bal- timore, Maryland.

(c) Every such corporation is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payment made in accord- ance with the provisions of this section.

*f % f 6

2744, XII-2 Cumulative Bulletin 402:

* * +k 8

Following the established rule of construc- tion, the expression “dividends declared” as used in the statute is to be construed and applied ac- cording to its accepted legal meaning. Stated briefly, the declaration of a dividend by the board of directors of a corporation has the legal effect of creating the relationship of debtor and creditor between the corporation and the stock- holder, and the rights of the stockholder as such creditor become immediately vested regardless of the fact that the dividend may be payable at some future time. In order for a dividend to be

4

fully ‘‘declared” within the meaning of the stat- ute the action taken by the board of directors must be such as to create the relationship of debtor and creditor between the corporation and the stockholder, and the debt so created must be a legal and enforceable debt which is definite, final, and irrevocable. A dividend so declared of course effects an appropriation of surplus to the payment of the debt thereby created.

* *K *K *f

STATEMENT

This is an action brought in the District Court of the United States for the District of Oregon, against the Collector of Internal Revenue, for the recovery of Federal excise taxes assessed and collected under Section 213 of the National Industrial Recovery Act. The case was tried before the court sitting without jury, jury having been waived by stipulation. (R. 12-13.) The facts were stipulated. (R. 13-21.) The District Court made special findings of fact and con- clusions of law: (R. 35-44), and gave judgment for tax- payer in the sum of $6,449.72, together with interest from December 28, 1935, from which judgment Col- lector has appealed to this Court (R. 45-47).

The court below found the facts as stipulated. The findings may be summarized as follows:

Plaintiff below, hereinafter referred to as tax- payer, is a corporation organized under the laws of

5

the State of Oregon with its principal place of busi- ness in the City of Portland. (R. 36.) On or about January 16, 1933, taxpayer’s board of directors at their annual meeting adopted and passed a resolution as follows (R. 37):

RESOLVED, that the Secretary and Treasurer of this Company be and he is hereby authorized, empowered and directed to pay monthly divi- dends of 14 of 1% each month for the year 1933 whenever in his judgment there are moneys avail- able to pay the same and further that whenever in the judgment of said Secretary and Treasurer there are moneys available to increase the amount of said dividends for any month or months there- of, said Secretary and Treasurer is hereby au- thorized, empowered and directed to pay such additional dividends.

Taxpayer paid dividends to the holders of its com- mon stock subsequent to June 16, 1933, and prior to December 31, 1933, as follows (R. 37-38):

Par value stock Per cent Paid in Total divi- on which divi- of divi- month of dend paid dend paid dend paid LOD) June ........ $ 14,883.00 $2,976,600.00 0.5% july 8 14,883.00 2,976,600.00 0.5% August .... 14,883.00 2,976,600.00 0.5%

September.. 14,883.00 2,976,600.00 0.5% October .... 14,883.00 2,976,600.00 0.5% November 14,883.00 2,976,600.00 0.5% December.. 29,766.00 — 2,976,600.00 1.0%

$119,064.00 4.0%

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An excise tax of 5 per cent of the dividends, ag- gregating $119,064, was assessed, with interest to De- cember 30, 1935, and paid by the taxpayer on De- cember 28, 193 ssa isoao0)

A claim for refund in the amount of $6,449.72 was filed February 21, 1936 (R. 40), and disallowed May 22, 1936 (R. 41). The taxes and interest paid amounted to $7,348.77. (R. 40.) The difference between the amount claimed and the amount paid represents the tax on one-half the dividends paid in December, 1933, being the dividends referred to in the last portion of the resolution of January 16, 1933. (R. 40, 41.)

The court below likewise found that (R. 42-43):

During the year 1933 plaintiff's earned sur- plus, available for dividends payable thereafter, as of the last day of certain months, was as shown in the following table:

As of the last day of Earned Surplus

1956

May § 724,125¢n junc eee 707,366.81 [ls ee eee 692,390.01 PUIGUS eee. 677,507.01 September 2s... 660,841.81 Ocrover 200 645,958.81 Nowemilen eae eee 631,075.81 Deceintete 546,515.12

At all times during the year 1933 plaintiff had earnings and profits accumulated subsequent to

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February 28, 1913, in excess of $300,000.00. At all times during the year 1933, there was money available in plaintiff's treasury to pay dividends on its common stock in amounts not less than one- half of one per cent per month on all outstand- ing common stock.

The court below concluded that the resolution of January 16, 1933, created a debtor and creditor rela- tionship by and between taxpayer and its stockhold- ers for the payment of the dividends taxed. (R. 43-44.)

SPECIFICATION OF ERRORS TO BE URGED

1. The court erred in rendering and entering its decision and judgment in favor of appellee and against appellant for the reason that the judgment is contrary to the law and is not supported by the facts as found by the court.

2. The court erred as a matter of law in con- cluding that the resolution of January 16, 1933, cre- ated a debtor and creditor relationship between the taxpayer and its stockholders for the payment of divi- dends of 14 of 1 per cent each month for the year 1933:

SUMMARY OF ARGUMENT

The resolution of January 16, 1933, did not con- stitute a declaration of dividends within the intend- ment of Section 213 of the National Industrial Recov- ery Act for the reason that the resolution did not cre-

8

ate a debt of the corporation in favor of the stock- holders. The payment of the dividends taxed was left entirely to the discretion of the secretary and treasurer of the company. The resolution of January 16, 1933, merely permitted payment of the dividends and was not an irrevocable declaration as required by the clear intent of the statute.

ARGUMENT

THE RESOLUTION DID NOT CONSTI- TUTE A DECLARATION OF DIVIDENDS SUCH AS IS CONTEMPLATED BY Sske- TION 213 OF THE NATIONAL INDUS- TRIAL RECOVER AC

The National Industrial Recovery Act was ap- proved and became effective June 16, 1933. Section 213 (a) thereof provides for an excise tax of 5 per cent upon the receipt of dividends by any person other than a domestic corporation. This section like- wise provides that the “tax imposed by this section shall not apply to dividends declared before the date of the enactment of this Act.”

The dividends taxed were paid after June 16, 1933, and prior to December 31, 1933, and are clearly taxable unless the resolution of January 16, 1933, is a declaration of dividends within the meaning of the exempting portion of the Act.

2)

The Bureau of Internal Revenue has ruled, LT. 2744, XII-2 Cumulative Bulletin 402, that (p. 403):

In order for a dividend to be fully “declared” within the meaning of the statute the action taken by the board of directors must be such as to cre- ate the relationship of debtor and creditor be- tween the corporation and the stockholder, and the debt so created must be a legal and enforce- able debt which is definite, final, and irrevocable. A dividend so declared of course effects an ap- propriation of surplus to the payment of the debt thereby created.

The court below found that the resolution of January 16, 1933, created an enforceable debt in favor of the shareholders and against the corporation. The wording of the resolution does not support this con- clusion. The resolution contains the following (R. oy):

RESOLVED, that the Secretary and Treasurer of this Company be and he is hereby authorized, empowered and directed to pay monthly divi- dends of 14 of 1% each month for the year 1933 whenever in his judgment there are moneys avail- able to pay the same * * *, (Italics supplied.)

The italicized words above constitute an expressed reservation. The question of the availability of funds is left to the sole judgment and discretion of the sec- retary and treasurer. It is not enough that the books reflect earned surplus. The designated officer of the corporation is empowered to determine whether any

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portion of the surplus is “available” for dividend pay- ments. If he decided that the earned surplus should be retained or used for purposes other than the pay- ment of dividends, the stockholders could not be heard to complain. Should the stockholders bring suit against the corporation to enforce the payment of the dividends, the corporation could successfully de- fend by pointing to the reservation contained in the resolution.

The dividends in this case constituted merely a division of profits among the stockholders equivalent to a constructive dividend declared as of the date of payment. Smith v. Moore, 199 Fed. 689 (C.C.A. Oth); Spencer v. Lowe, 198 Fed. 961 (CCAS stay

In United States v. Murine Co., 90 F. (2d) 549 (C.C.A. 7th), certiorari denied, 302 U.S. 734, the court held that the resolution there relied upon as a declaration of dividends did not come within the ex- empting portion of Section 213, supra, for the reason that the resolution contained a qualifying clause negating any debtor and creditor relationship. The resolution in that case contained the following (p. 59)

* % and that in the event, in his [treasurer] judgment, the condition of the treasury * * *

shall not warrant the payment of such dividends, he may omit the same * * *,

In Carney v. Crocker, 94 F. (2d) 914 (CCA.

ol

Ist), the court arrived at the same decision. In that case the resolution relied upon contained the follow-

ing (p. 915): * > = subject to the approval of the President and Treasurer and Assistant Treasurers.

This Court in United States v. Southwestern Port- land Cement Co., 97 F. (2d) 413, considered the same question and decided that a resolution contain- ing the words ‘unless otherwise ordered by the Board of Directors” was not a sufficient declaration within the exempting portion of the Act. See also Alexander & Alexander, Inc. v. United States, 22 F. Supp. 921 (Md.), and Lockhart Iron & Steel Co. v. O'Toole, 22 F. Supp. 919 (W.D.Pa.).

The case of Evening Star News paper Co. v. United States, 16 F. Supp. 1020 (C.Cls.), 1s not controlling in the instant case for the reason that there the presi- dent was delegated the power to declare dividends. In January, 1933, the president announced that divi- dends would be paid, which action was approved by the board of directors on May 1, 1933, thus establish- ing the debtor and creditor relationship between the corporation and its shareholders prior to June 16, 1933, the effective date of the Act.

The United States Court of Claims decided ad- versely to the Government in Alabama Pipe Co. v. United States, 21 F. Supp. 173. The resolution in- volved in that case more closely resembled the one in

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the instant case. However, the resolution was adopt- ed in February, 1932, calling for a dividend in the amount of $145,974. Prior to June 16, 1933, $114,- 856.80 of the dividend had been paid. It was only the small remaining portion of the dividend, paid after the effective date of the Act, which was sought to be taxed. Those circumstances are not present in the instant case and appellee here can not say that it might be estopped from testing the validity of the resolution in a suit by a stockholder where most of the dividend had already been paid to the sharehold- ers.

The case of United States v. Southwestern R. Co., 92 F. (2d) 897 (C.C.A. 5th), is not in point for the reason that that case was concerned with the sole issue as to whether or not the corporation was in receipt of the funds from which the dividends were to be paid. The question of the sufficiency of the resolution was not in issue. Cf. Greenwood Compress & Storage Co. v. Fly (S.D.Miss.), decided August 10, 1938, not of- ficially reported but found in 1938 P.H., Vol. 1, par. DD Keilie

We submit that no logical distinction can be found between the instant case and the cases of United States v. Southwestern Portland Cement Co., supra; United States v. Murine Co., supra; and Carney v. Crocker, Su pra.

1 CONCLUSION

The judgment of the lower court is not correct and should be reversed and judgment should be entered for appellant.

Respectfully submitted, JAMES W. MORRIS, Assistant Attorney General. SEW ALL KEY,

JAMES P. GARLAND, Special Assistants to the Attorney General.

CARL C. DONAUGH, United States Attorney. DECEMBER, 1938.